Any Fear of Dynamic Pricing?

Earlier this year, I had the opportunity to attend the Mid-America Regulatory Conference here in Kansas City, Missouri. Traveling to the land of the state utility regulators was quite an experience. I found them to be quite open, maybe because most were in their jobs on the order of years not decades, so they were not too set in their ways.

I was curious to find out why regulators are so interested in customer-side solutions including demand-based pricing. Several regulators mentioned that they were between a rock and a hard place when supporting new base-load generation, particularly fossil-fuel generation. They were more likely to support demand-side solutions that could be rolled out more quickly and that would reduce the need to build generation.

Of course, load-reduction and load-shifting initiatives are not confined to the Midwest, and this movement to support demand reduction and load shifting is growing. According to the Consortium for Energy Efficiency, electric utility energy-efficiency budgets have grown by 60% over two years, reaching US$4 billion in 2009, up from $2.5 billion in 2007.

Approximately half of all states now have means of compensating utilities for lost revenue as a result of energy-efficiency initiatives. Many states have additional incentives that assure that investments in energy efficiency will deliver the same return as other utility investments.

Because electricity is historically built to meet peak demand, any mechanism that can cause consumers to reduce peak use should provide benefit to both providers and consumers. Real-time pricing (RTP) typically has been offered to larger customers so that energy bills are directly linked to the wholesale cost of electricity, providing an incentive to change usage behavior.

Over the past several years, more than 70 utilities have offered RTP in either pilot or permanent programs, primarily to their largest customers. Georgia Power, for example, has operated a successful and perhaps the most well-known RTP program with its largest customers for about 20 years. Similarly in New York, utilities are required to offer their largest customers hourly rates.

Here are a few of the available pricing schemes:

Time-of-Use (TOU) rate structures reflect the higher cost of supply during peak, but they are not dynamic because their structure is not linked to wholesale market hourly prices.

Critical Peak Pricing (CPP) is a price signal provided for a time frame of critical hours, rather than on an hourly or sub-hourly basis.

Peak Time Rebate (PTR) is similar to CPP except that a rebate is issued for hours reduced below their baseline usage of electricity.

We have 30 states with renewable energy portfolio standards that state that by a certain date a percentage of each state's supply portfolio must come from renewable sources. California, for example, has the highest targets with 25% renewable by 2015 and 30% by 2020. But wind, in particular, is highly variable, and solar has a fairly low availability, so system operators are eager to have access to demand-side solutions on low wind and cloudy days.

Arguments abound as to how much demand response actually exists. In June 2009, the Federal Energy Regulatory Commission (FERC) published a staff report entitled “A National Assessment of Demand Response Potential” that included several scenarios. Under the “full-participation” scenario — with the assumptions that advanced metering infrastructure will be universally deployed and that dynamic pricing be made the default tariff and offered with proven enabling technologies — we would see a reduction in peak demand of 188 GW by 2019. This is a 20% reduction in peak demand by 2019 compared to a scenario with no demand-response programs.

Customers Say They Want Choice

Frost & Sullivan released its end-user survey “Smart Grid Market — A Customer Perspective on Demand Response.” This survey of 600 U.S. residential homes reveals that close to 45% of residents report an increase in their electricity bill due to, in large part, an increase in electricity consumption. Nearly 60% of residential energy consumers are willing to change their electricity-use patterns to save money, though many seek savings in return for signing on to a demand-response program.

Frost & Sullivan further reported that 60% of the respondents support direct load control and an amazingly high 77% said they support dynamic pricing.

Of course, residential energy customers want the ability to choose load control and the ability to choose dynamic pricing. A better question is whether they will stick with it. If they have a bad experience, their experimenting days will be through. If we make it mandatory, I expect it will not be mandatory for long.

We can learn a lot from when telecom was deregulated. Remember the cheap nights and weekends plans? And the rollover minutes? We seemed to love our choices until we had that monster bill from hell. Maybe it was roaming charges that added up on a vacation. Or a teenage son or daughter whose love interest moved, and he or she started burning up the hours. How long did it take you to call and complain and get a little concession and switch to another plan?

We now have Microsoft Hohm and Google Power Meter, and we have emerging energy services companies with really slick tools. And it does not take too much imagination to envision a day when your smart phone app tells you to chill on the energy use unless you want a billing surprise come month end.

Utilities in 16 states now offer some form of dynamic pricing. We are putting choice in the hands of our customers. And we will see even more choices coming as more smart grid initiatives with demand-side functionality roll out. I expect that we are about to get on “the ride of our lives” as we enter an era of chaos that could well exceed any experienced in our lifetimes.